83(b) Election

When an employee or founder receives stock subject to a cliff vesting schedule, Internal Revenue Code section 83 normally taxes the value of the shares as ordinary compensation income each time a tranche vests, measured at the then-current value. An 83(b) election reverses that timing. The recipient reports the value at grant, less any amount paid, as income immediately and starts the capital gains holding period on the entire award. If the stock is granted early at a very low value, the tax cost of the election can be small and the upside meaningful.

The election must be filed with the IRS within 30 days of the transfer. There is no extension, no late relief, and the recipient must also furnish a copy to the employer, which needs it to report the income on Form W-2 and withhold employment taxes.

The election applies to restricted stock and to early exercised options, not to standard restricted stock units, which are settled under their own timing rules. Holding periods drive the tax on other equity as well: selling shares bought through an employee stock purchase plan before that plan's holding periods are met creates an ESPP disqualifying disposition, which turns part of the gain into compensation income. Shares that vest on a sale can also land in the golden parachute calculation. The main risk is paying tax on value that never materializes: if the recipient leaves before vesting or the company fails, the tax paid at grant is not refundable and no loss deduction restores it. Employers should point employees to their own tax adviser rather than advising on the choice.

Frequently asked questions

How long does an employee have to make an 83(b) election?

Thirty days from the date the stock is transferred. The deadline is strict, with no extension and essentially no relief for a late filing, so the decision has to be made quickly after grant. The recipient files the election with the IRS and gives a copy to the employer for payroll reporting.

What happens if the stock later becomes worthless?

The tax paid at grant is gone. An 83(b) election accelerates income to the grant date, and if the recipient forfeits unvested shares or the company fails, there is no refund and no loss deduction that restores the tax. That downside is why the election makes the most sense when the grant value is very low.

Does an 83(b) election work for restricted stock units?

No. The election applies to transfers of actual property, which covers restricted stock and early exercised options, but not standard restricted stock units. RSUs are settled under their own timing rules, and no equivalent election is available, so employees holding RSUs should not assume the same planning applies.